Vinny’s Blog

We all know about Fannie and the sister company Freddie. Like I mentioned in my previous post get ready to see lot of fireworks and looks like already the show is in the planning stage. Lot of ideas have been floated since recently and criticized. Just check out the headlines.

Fannie, Freddie must not be allowed to fail: Poole

http://uk.reuters.com/article/marketsNewsUS/idUKN1133768020080711

Fannie Plan a `Disaster’ to Rogers; Goldman Says Sell (Update4)

http://www.bloomberg.com/apps/news?pid=20601087&sid=ana3QllbJTkY&refer=home

Fannie-Freddie lifeline puts taxpayers on the hook

“If the government hadn’t moved and Fannie and Freddie failed, the cost to taxpayers and the overall economy would be enormous,”

said Mark Zandi, chief economist at Moody’s Economy.com.

Fannie and Freddie’s financial reports remain difficult to understand, even after accounting scandals that came to light five years ago forced the companies to restate several years of earnings and oust top executives.

“At the end of the day, with a little bit of luck, it won’t cost taxpayers a dime,” Zandi said.

http://biz.yahoo.com/ap/080714/mortgage_giants_crisis.html

And damn it…tax money it is to the rescue……

Paulson Puts Treasury’s Weight Behind Fannie, Freddie (Update3)

http://www.bloomberg.com/apps/news?pid=20601087&sid=anZQxigkBkQ0&refer=home

Funny thing is how the mess always un-folds over a weekend. Bear was on a weekend, Indy Mac bank was on a weekend, Fannie was on the weekend and generally on Saturday.

Why can’t this happen on a weekday ? hum ! Let me guess, it would be too risky wouldn’t it…market may react so badly that they may actually go down deep into bear territory and who wants that. So it’s safe to declare all bad news during the weekend. That gives enough time (almost 2 days) for people to digest the bad stuff. Amazing how it’s done. But then again if -2+-2 could be made to look like 4. Accounting rules could be bent to meet the balance sheet this is just news…..big deal…get over it !

Anyway this fairy tale economy, the land of make belief , whatever you call it [Washington post thinks it's Mirage economy The Fading of the Mirage Economy

http://www.washingtonpost.com/wp-dyn/content/article/2008/05/27/AR2008052703077.html]

is increasingly getting into a difficult spot as I see it. [Again these are my views based upon study I have done...please feel free to draw your own conclusion]

And, here is the problem that seems to be too big to solve at least to me, may be you can help.

So…International Monitory Fund thinks total loss is estimated to be approx 1 Trillion dollar (945 billion) let us take the lower number others think it’s 1.3 Trillion $………but the problem is “We’re only about a third of the way through the writedown”

“June 18 (Bloomberg) — John Paulson, founder of the hedge fund company Paulson & Co., said global writedowns and losses from the credit crisis may reach $1.3 trillion, exceeding the International Monetary Fund’s $945 billion estimate.

“We’re only about a third of the way through the writedowns,” Paulson, 52, told the GAIM International hedge fund conference in Monaco today. “There are a lot of problems out there and it will continue to be felt through the year. We don’t see any signs of stabilizing.”

[Source : http://www.bloomberg.com/apps/news?pid=20601087&sid=alYak4riQl0c&refer=home]

And that is the problem, if Fannie and Freddie are in such trouble now when we’re only 1/3 into it…….what is going to happen when we are into it fully ? as you may know that these companies are insolvent. ALREADY !!

“Former Fed President: Freddie, Fannie Insolvent “

http://www.smartmoney.com/breaking-news/smw/index.cfm?story=20080710085412

Looks like severity of this problem lies in the interpretation of your own….as per me this is one problem that could cause global financial disaster……..

Paulson, Bernanke call on Congress to act

Policymakers urge legislation aimed at reshaping nation’s financial system. Treasury Secretary says work on reforms must begin now.

“I believe the evidence is now clear that we are in one of the most serious economic troubles that we have seen recently because, in part, of an inadequacy of regulation,” said Frank.

http://money.cnn.com/2008/07/10/markets/regulation_hearing/index.htm?postversion=2008071011

Now this reminds me of a drug addict guy. Recall in your memory what happens to a drug addict when he does not get his fix at the right time. Well, looks like situation here no different than that..and Funny thing is I got this from Fannie’s website directly.

As Fannie Mae’s funding needs are so significant and constant, it is important for the corporation to consistently deliver value to its investors by creating securities that meet investors’ needs and adapting its funding approaches to meet the evolving demands of the marketplace.

http://www.fanniemae.com/markets/debt/understanding_fm_debt/understanding_debt.jhtml?p=Debt+Securities&s=Understanding+Fannie+Mae+Debt&t=Introduction+to+Fannie+Mae+Debt+Securities

Funding needs are so constant and important like drug for the addict that it must continuously delivery junk to it’s investor no matter what.

This junk is already causing pain else where…it’s not making a lot of people happy. A Swiss company stock just went down because people found out that it holds Fannie paper…

July 16 (Bloomberg) — Swiss Reinsurance Co., Switzerland’s largest reinsurer, fell in Zurich trading after saying it had $9.6 billion of corporate debt from Freddie Mac and Fannie Mae, the beleaguered U.S. mortgage-finance companies.

Swiss Re dropped 1.45 francs, or 2.3 percent, to 60.75 francs, bringing losses this year to 24 percent and giving the company a market value of 22.5 billion francs ($22.2 billion).

http://www.bloomberg.com/apps/news?pid=20601085&sid=aHW3Za1jXjT4&refer=europe

And this is just out of many companies that we know of, Fannie and Freddie combined together have turned out $5 Trillion dollars worth of paper in the market.

The $5 trillion mess Fannie Mae and Freddie Mac were created by Congress to help more Americans buy homes. Now their shaky condition threatens the entire housing market

http://money.cnn.com/2008/07/11/news/economy/fannie_freddie.fortune/index.htm?postversion=2008071110

These countries hold most of it. China hold $376 billon worth of Fannie paper

Chinese Government is Top Foreign Holder of Fannie Mae, Freddie Mac Bonds

$376 Billion in Chinese Agency Bond Holdings Subject to Taxpayer Bailout Proposals According to FreedomWorks Analysts

http://www.marketwatch.com/news/story/chinese-government-top-foreign-holder/story.aspx?guid=%7B347DF7BF-F0B7-48C9-A418-5A0B903D9F72%7D&dist=hppr

Foreign central banks, led by China and Russia, hold at least $925 billion in U.S. agency debt, including bonds sold by Freddie and Fannie, according to official U.S. statistics.

http://www.bloomberg.com/apps/news?pid=20601039&sid=aA1AyYa1w8mY&refer=home

If you own a stock or an investment and see it’s going down will you hold on to it till it looses all or most of it’s value ? I have no reason to believe these countries will hold on to these enormous amount of investments only to see it’s value going down and they are loosing on two fronts simultaneously. First they have already lost in currency as $ has lost it’s value. Now, the investment itself is going down in it’s value.

And they might have made it further easier for people to sell their stock.

Fannie Mae, Freddie Mac May Halt Dividends on Losses (Update4)

http://www.bloomberg.com/apps/news?pid=20601103&sid=aN4EqU3cGjhE&refer=us

Imagine what may happen if China and Russia dump Fannie’s paper ? Who you think have more power those who created the paper or those who hold it ?

“ I’m afraid that I am a prophet of doom. I don’t like it and I don’t think I’m predicting anything unconditional because I think that how the situation will evolve depends on how the authorities respond to it. But, unfortunately, we are in that phase of the super bubble.”

Though it almost sounds like something I could have said (thank you) but no these words are of none other but of Mr. George Soros himself……….

[http://www.macleans.ca/canada/features/article.jsp?content=20080612_200358_9476]

Question still is un-answered we are only 1/3rd into it…….what happens when we are fully into it ?

May be you can help me out with the answer here…… ? better still help yourself dear !